Gold, Silver, Metal Prices Commentary – May 17, 2010

Overnight metals markets witnessed plenty of price action in Asia and Europe as opposing speculative forces continued their confrontations without pause.

After first gaining traction and rising by nearly $10 to a high of $1243.10 gold bullion was off by nearly the same $10 in the opposite direction as the euro managed a climb back from under the $1.23 level. Volatility and nervousness were definitely on the rise this morning ahead of the NY session’s opening.

Meanwhile, the world’s traditional engine of physical demand exhibited signs of sputtering quite badly in the wake of last week’s $1250 price tag for an ounce of gold. Stratospheric metal prices held would-be Indian buyers at bay over the weekend, just as the nation celebrated Akshaya Trityia – a key Hindu festival that is considered to be an auspicious time to buy the precious metal. Sales at local gold outlets were anything but auspicious.

“Buying was very poor — probably 90 percent lower than the previous year,“ Suresh Hundia, the President of the Bombay Bullion Association, said when queried about gold sales level during the festival.

New York spot dealings started the week off with losses in the precious metals complex. Against an uncertain background of a still-rising dollar (nobody seems to mention the remarkable flexing of muscles by a supposedly dead-and-gone-by-now greenback), a 226-point loss in the Nikkei overnight, and a sizeable price percentage drop in various base metals, gold opened with a $4 loss at $1227.40 bid per ounce, as profit-takers appeared to take momentary control of the market helm. The yellow metal remains in a $1220-$1260 channel for the time being, and is still showing a Kilimanjaro-sized 975 tonne pile of long positions standing and casting a…long shadow in the market.

Market technicians over at Barclays Capital (yes, that name, again) warned that gold revealed some ‘disconcerting’ technical signals on the price charts and that in coming days ‘prices may not ‘necessarily strengthen.’ — an interesting way to state things. Silver fell 26 cents on the open, starting the day off at $19.06 after having been unsuccessful at overcoming the mid-$19 area resistance. Platinum fell to under $1700 this morning, losing $20 to open at $1697.00 per ounce. Palladium fell $11 to the $513.00 mark and rhodium eased $20 to the $2760.00 bid level.

News that European car sales fell for the first time in ten months in April dented hitherto buoyant sentiment in noble metals ETFs and sent prices lower. Europe’s version of ‘cash-for-clunkers’ drew to a closed recently. Still, a Reuters survey of 26 metals analysts shows a median platinum price forecast of $1650.00 per ounce, and a palladium one at $488.00 per ounce, for the current year.

Both estimated figures were higher than previous projections offered in January. Supply concerns were cited among the bullish factors supporting prices in the future, with palladium showing better prospects than platinum. Although those polled acknowledged that the trade is ‘quite crowded’ at this time, the expectations that ETFs will continue to provide investment-flavored lift to the complex remained intact.

Speaking of crowded trades, gold’s Wednesday closing Daily Sentiment Index (as per www.trade-futures.com) hit 98%. That represented an all-time record optimistic extreme that dates back to 1987 — another ‘epic’ year in markets. In other words, at this juncture, everyone holds view that gold will continue higher.

It was reported by one Elliott Wave analyst that when such an extreme finding was presented to the many gold bugs on hand at the recent Las Vegas Money Show, "none would acknowledge any risk whatsoever to their view of gold’s ever-upward trajectory, nor would they concede that an extreme in optimism meant anything to gold because “the euro is breaking up and gold is the only safe haven.”

The same analyst asks us to "note the exponential bowl that gold’s price is climbing. Breakdowns from these bowls nearly always result in sharp declines." Veteran market observer and original forecaster of $1245 gold, Ned Schmidt, (how close did he come?) opines that "the current gold market has "moved onto a far more energetic, and dangerous, stage. It is feeding off of price expectations. Gold is being bought because everyone "knows" the price of gold is going up. Investors in Japan are not buying gold because of the Greek crisis. They are buying because they "know" gold price is going up. That is the dangerous final stage of a parabolic rise."

Indeed, ABC News Money reveals that man-in-the-street-mania has now hit gold, with average savers casting a wary eye on 401Ks and piling into gold simply because they either heard it was rising, or ‘know’ that it will continue to rise.

Mr. Schmidt warns that "A popular school of investment thought for more than a decade has been that the risk of being invested in a market decreases as the market price rises. Actually, the reverse is true. Market risk rises as market prices rise. What happened to the internet stocks? What happened to the price of housing? What is the risk in US$-priced gold? Placing a number on that is obviously more than a little difficult. That said, the risk in gold would seem to be down to US $750-970. While a short-term parabolic rise is evident, some support for gold from a weakening of the Euro versus the dollar is possible. Downside risk might be to $625-800." That pesky $800 level just keeps resurfacing –albeit in very few daring publications these days…Coming from a trend-spotter who offered up the prospect of $1245 gold when it was regarded as sci-fi, the warning ought to carry a different weight.

Alluding to the folks mentioned in the ABC News piece, Mr. Schmidt observes that: "People concerned with the size of their bank deposits, or fearing inflation from quantitative easing, banks replenishing their cash reserves with prop trades were the key drivers. But it is deflation -not inflation- which is now more likely on the menu and few are prepared for it. Austerity packages are powerful recession generators. Higher taxes and spending cuts will add to consumer anxiety and social tensions. Banks deprived of prop trading and OTC deals may resort to margin hikes, interest rates may rise too since market regulators have lost control of the long end of the yield curves."

The feeding-frenzy is set to continue. No significant announcements have come out of the Old World over the weekend although EU officials have called for a ‘quantum leap’ in policy by ECB Chief Trichet. Let’s see where markets will leap based upon such clarion calls.

In addition to bullion American Silver Eagles that are already available, the United States Mint this year will also issue 5 oz. bullion America the Beautiful Silver Coins that are duplicates of the America the Beautiful Quarters. The first of five coins will be released this summer, with the remaining four to follow in short intervals. Check the above link to visit a sister site to CoinNews for more information on the series.